Price rises blamed on trivia: truth about policies

DEUN

Meridian Energy, in its prospectus on renewable energy shares, warns that Government's recent decisions will make power prices rise. It quotes "a mandatory floor on spot prices during conservation campaigns."

This is a red herring; it will have only a tiny influence on wholesale prices. Conservation campaigns are rare, but wholesale prices are rising relentlessly. Even in 2009, the wettest year since the market began, wholesale prices were 25% higher than in 2004, the second wettest year. More water was spilled to waste in 2009, so wholesale prices should have been lower than in 2004.

The basic premise of New Zealand's market design is that when hydro energy is in surplus, wholesale prices should be driven down to the running cost of gas-fired generation, or to near-zero when water is spilling to waste. Instead, the spot price in the North Island averaged almost a half cent higher than the cost of running gas-fired generation.

A new pricing rule is described in a report commissioned a year ago by Mighty River Power. It says that wholesale prices should not be driven down by competition between wholesale generators, but should be allowed to settle at around the cost of electricity from new power stations.

The report specifically condones companies withdrawing capacity to keep spot prices up, "until average prices cover entry costs, with sufficient certainty." The term "entry costs" means the cost of generating from new power stations - including the cost of building them.

The report agrees the effect of withdrawing capacity looks very much like the exercise of market power - which was estimated by Wolak to have cost New Zealand $4.3 billion during three hydro shortages. The report confirms the market is not working as designed, but says unless average prices can pay for new power stations, they will not be built and New Zealand will run short.

What the report doesn't say is that withdrawing capacity can, and does, reduce the security of supply - this market behaviour is bad not only for prices but for security. This confirms DEUN's assertion that shortages are profitable, and that this is a real driver for players on the spot market.

The report's title page notes that it is supplied "for the purposes of facilitating discussion with the client, and within the industry." Indeed! The paper was not discussed with domestic electricity consumers, nor has it been peer reviewed. But it certainly supports the Minister's repeated assertions that prices have to rise.

DEUN calls on the Electricity Commission to peer review the report, with specific reference to fair pricing for domestic and other mass-market consumers.